Abdul Rahim Abdul Wahab, FSA

Director & Actuary

Actuarial Services Division
abdul.rahim@sidathyder.com.pk
Sidat Hyder Morshed Associates (Pvt) Ltd
Islamic Finance & Investment Symposium 6 - 7

What is covered

Gap in Islamic Finance

Conventional Insurance
Takaful Concept
Takaful Rules
Retakaful
Market Potential
Islamic Banks and BancaTakaful
Actuarial Services Division

Sidat Hyder Morshed

Gap in Islamic Finance

Islamic Banks contracts require assets to be

insured with a Takaful company as per Shariah
requirement.

Many potential consumers of Islamic Finance stay away due to

Insurance being on conventional basis.
Doctrine of Necessity applied till Takaful was not available.
Takaful Rules promulgated in September 2005.
One General takaful operator since last one year. More to follow in
coming months giving consumers a choice within takaful.
Takaful exists for almost 30 years typically with 2 to 3 years lag
with Islamic banking development. Started with Sudan, later ME
and Malaysia.

Also number of synergies could be created with

Islamic banks distributing takaful products
(BancaTakaful) or setting up takaful companies
with equity participation.

Standing requirement of Islamic Banks for Islamic House

Mortgage schemes, Car Ijarah schemes as integrated benefits.
Distribution of Takaful Savings and Protection plans in different
forms.

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CONVENTIONAL INSURANCE
Indemnification against unforeseen financial
losses (not to profit from loss)
Commercial Risk Transfer
Law of Large numbers - Insurance company
pools risks/reinsures above capacity.
Recovers expenses for managing the pool
Investment return under life insurance
shared with PHs based on Actuarial
Valuation or otherwise.
Profit for the shareholders based on
Underwriting results and Investment income
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OBJECTIONS TO
CONVENTIONAL
INS
Objections to Conventional Ins

Elements of:
Uncertainty Gharrar (nonexistence of goods, un-known
quantity, timing) in a commercial
risk transfer contract.
Interest Riba

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BASIC CONCEPT OF TAKAFUL

Takaful means Joint Guarantee for mutual
assistance within a group. Each member of the
group pools to support the needy within the
group.
Mutual
protection
contains
elements
of
cooperation, shared responsibility joint help
all encompassing in takaful concept
Principle objective is the same as Insurance - to
indemnify against unforeseen financial losses.
Mechanism followed is however different.
An economic institution whereby the losses of
the unfortunate few are shared by the
contribution of the fortunate many who are
exposed to the same risk on
Co-operative Risk Sharing basis.
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HOW IS IT DIFFERENT FROM

INSURANCE
Concept of Risk Manager NOT Risk Taker
Underwriting Surplus belong to Participants
Underwriting Deficit may be shared by
participants
Risk Management
Underwriting as usual
Ensure Risk premium adequate not
commercial driven
Retakaful Pool instead of Reinsurance
Interest free loan by SH (Qard Hasnah)
Investments compatible with Shariah based
on Profit Sharing principles
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CONVENTIONAL vs TAKAFUL
Issue

Conventional

Takaful

Organization
Principle

Profit for
shareholders/
Risk transfer

Mutual for participants

Risk remains with
participants
No underwriting profits for
SHs

Form of
Relationship

Commercial
Exchange/Contrac
t of compensation

Cooperative, Shariah
contracts of Wakala or
Mudarabah with
contribution for mutual
assistance

Capital

Shareholders

Operator provides set-up

capital.

Laws

Regulations

Regulations plus Sharia

approval

Ownership

Shareholders

Participants of Takaful Fund

Equity/debt-no
Investments
Actuarial Servicesrestrictions
Division

Sharia compliant
investments only / No
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interest

Takaful Rules 2005

Capital requirement 80 m for General and 150 m for
Family. Likely to be increased to Rs.300m for General
and Rs.500 m for Family. Board of Investment
requirement is $4 million (Rs. 240 million) at present.
Composite companies not allowed
Wakalah Model for Risk Protection
100% Surplus distribution for participants (after
reserves etc)
Underwriting deficit Qard Hasnah by SH or recover
Mudaraba or Wakala Model for Investment Sharing.
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Takaful Rules 2005

Takaful company can also share risks on
coinsurance basis from outside Pakistan
Can use conventional reinsurance, only if
retakaful is not available and if Shariah Board
permits. Wakala based would be preferred.
Windows not allowed for atleast 5 years
Transformation of existing conventional general
companies is allowed in one year
Three member Shariah Board and Annual
Shariah Audit
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RE TAKAFUL
Retakaful
solutions
evolving
although
not
enough
capacity
available.
Best Re (Tunisia), Asean Re (Labuan)
and Tokyo Marine are providing
retakaful based on Mudaraba model.
Shariah scholars and SECP have
objections to Mudaraba model. Need
to look for Wakala based Retakaful
solutions as a preferred route.
Lloyds syndicate is setting up a
Retakaful
solution
for
General
Takaful.
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RE TAKAFUL
Takaful Re launched in Dubai by ARIG with $125 m
capital. Recently rated BBB by S&P becoming the 1 st
Retakaful operator with a rating and Wakala based model.
Swiss Re recently launched Wakala based Family
Retakaful Fund.
Hannover Re is working on Retakaful solutions.
Munich Re has also incorporated its Retakaful subsidiary
in Malaysia.
Doctrine of Necessity may no longer be justified
hopefully leading to Takaful being backed by RETAKAFUL
rather than Reinsurance.
Government/ SECP needs to encourage setting up of
Retakaful pools.
Possibly within NICL / PRCL for General Retakaful
State Life for Family Retakaful

Actuarial Services Division

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Market Potential
Pakistans insurance
density and insurance
penetration rates low.
Reasons Lack of
awareness and religious
concerns.
Takaful can help push
the penetration rates up.

Actuarial Services Division

Sidat Hyder Morshed

Growth of Life Insurance Premium

Actuarial Services Division

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Growth of General Insurance Premium

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ROE OF INSURANCE INDUSTRY

RETURN ON EQUITY (%)

GENERAL INSURANCE

Year

AverageEquity
Weighted(%)

EFU

AIC

NJI

Shaheen

Askari

2005

58

56

63

57

39

28

2004

33

60

27

30

11

23

2003

32

33

29

41

21

16

2002

21

17

21

25

18

13

LIFE INSURANCE

RETURN ON EQUITY (%)

Year

AverageEquity
Weighted(%)

EFU

NJI

ALICO

METRO

2005

26

43

15

15

2004

27

47

21

2003

26

40

33

13

2002

14

17

-4

21

Actuarial Services Division

Sidat Hyder Morshed

Islamic Banking
Dec
02

Dec
03

Dec
04

Dec
05

Mar
06

June
06

Number of full fledge Islamic

Banks

Number of Islamic Bank

Branches

10

23

37

39

48

No. of conventional banks

operating Islamic Banking
Operation

10

11

Number of stand alone

Islamic Branches of
conventional banks

21

33

34

39

Number of Branches expected to grow exponentially

Two new banks Emirates Global Islamic Bank Limited and First Dawood Islamic
Bank Limited
State Bank growth estimates for Islamic Banks

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Islamic Banking Growth

Rs. In billion

Source: SBP Publication June 2006

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Opportunities General Takaful

Islamic Banks have a mandated requirement / moral obligation to insure

assets from a takaful company if available.
Islamic Banks had disbursed Rs.58 billion (approx) June 2006 in
various assets
General Insurance market size 2005 GWP Rs. 20 Billion (approx.), 38
companies
Even if 10% switch to this basis it is more than Rs. 2.0 billion.
Untapped Market - Individuals do not take insurance - Motor, PA, Health,
Home
Even if 10% of existing market do not insure for religious reasons, its
over 2 billion.
A large number of industrial groups have shown interest in takaful.
Only one Takaful operator licensed in Pakistan, so far!! More to follow

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Opportunities Family Takaful

Islamic Banks require life cover for House financing etc.
Life Insurance market size 2005 GWP Rs. 18 Billion (approx.), 4
private sector companies. Talks of SLIC being privatised in some
form.
Even if 10% switch to this basis it is more than Rs. 1.8 billion.
Untapped Market - Individuals do not take insurance Just 2.5
million individual life policies
Even if 10% of existing market do not insure for religious reasons,
its almost 2 billion.
A large number of industrial groups are interested in group life and
health benefits based on takaful.
No Life takaful operator so far!! Some under formation
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TAKAFUL IN THE WORLD

World Takaful Conference Dubai April 2006
Around 70-80 companies are now operating in 28 countries.
Takaful is one of the fastest growing sectors of the insurance
industry with around 20 per cent annual growth compared to
less than 10% for conventional.
Global Takaful premiums are estimated at $3 billion, of which
60 per cent is general takaful and the remaining is family
takaful.
Middle East accounts for 36 per cent of premiums and about
56 per cent is generated in South East Asia.
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SYNERGIES AMONGST ISLAMIC

FINANCE PARTICIPANTS

Takaful Operators,
banks and Capital
market players
continuously focus
on product building
to offer more
attractive products
that fulfill the
differentiated needs
of the customers.

Actuarial Services Division

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Synergies in Islamic Financial System

Islamic Banks, Capital Markets and Takaful Operators work together to develop
products using each others strengths leading to competitive products.
Takaful Operators fill the gap by providing Shariah compliant protection for Islamic
Financing Products.
Islamic Banks and takaful operators work together to distribute takaful savings
and protection products under bancatakaful arrangements in a more cost effective
manner leading to better consumer values.
Takaful Operators need longer term investments which fulfill the long term
financing needs of Islamic financial institutions
Long term investments enable takaful operators to offer better returns to its
customers and shareholders.
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BANCATAKAFUL
A mechanism for distribution of takaful products through banks.
Advantages for banks:
Additional fee income from existing customers received upfront.
Additional product offering
Increase customer retention by offering long term plans
Simple examples are:
Motor Takaful policy with Car Ijarah of Islamic Bank
Family Takaful cover with Housing or other financing facility.
Depositors protection
Credit card protection
More complex products include:
Savings products
Education products
Retirement products
Protection products
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BANCATAKAFUL TRENDS IN ASIA

Based on research conducted by Swiss Re Sigma report (2002)
by 2006, bancassurance could potentially account for 13% of total
premiums collected in Asias life insurance sector and 6% in the non-life
sector.
A large interest from insurers at this time as they seek to diversify
from traditional and less productive agency channels.
Distribution agreements appear to be increasingly common as a
business model in Asia Pacific but increasing focus by major banks
in JVs and ownership models.
Most of the larger banks in each country have an interest in a
bancassurance operation, or plans to enter the manufacturing area
moving from fee income to value creation, by setting up its own
insurance company.
Actuarial Services Division

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Recap
Protection against unforeseen financial losses is a
concern for many. Religious prohibition stops.
Takaful Offers a huge potential market by filling the
gap which remains untapped at present.
Competitive Pricing of Takaful products would remain
a key factor along with quality service.
Bancatakaful could fast track efficient distribution and
better customer value.
Adherence to Shariah principles in operational
practices would be the long term driver for success.
Actuarial Services Division

Sidat Hyder Morshed

THANK YOU
Abdul Rahim Abdul Wahab, FSA
Director & Actuary
Actuarial Services Division
abdul.rahim@sidathyder.com.pk
Sidat Hyder Morshed Associates (Pvt) Ltd
Islamic Finance & Investment Symposium 6 - 7 Dec 2006,
Karachi

Actuarial Services Division

Sidat Hyder Morshed